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Being in debt is one of the most stressful things in life. It’s a terrible feeling to know you owe money and it’s even worse when you’re living paycheck to paycheck, without much left over. It can feel overwhelming to think about how you’re going come up with a plan for debt pay off to pay what you owe. Credit cards, student loans, car loans, mortgages – ugh, it’s the not-so-fun part of adulting. And consumer debt is at an all-time high. Total household debt for Americans at the end of 2017 was over $13 TRILLION DOLLARS. Do you know how many zeroes are in that number? Twelve.
You may be wondering why you should even bother trying to pay off debt when you’re barely scraping by as it is.
The peace of mind that comes from being financially free and totally in control of your money outweighs any sacrifices you may have to make to get that debt paid off. Trust me. It’s worth it.Paying off debt is a lot like going on a diet to lose weight. The extra weight didn't appear overnight and it's not going to disappear overnight either. It takes hard work, dedication, and sacrifice to meet your goals.Click To Tweet
The first steps are the hardest when you’re starting out on a journey. This is especially true if you don’t have a plan or a specific destination in mind. Even if you do have a plan, it can be hard to see the end of the road when it seems so far away.
So where do you start in your journey to pay off debt?
Begin at the beginning. And go on until you come to the end: then stop.
Lewis Carroll, Alice’s Adventures in Wonderland
I’ve always loved that quote. You can’t really argue with the logic, right?
Let’s begin at the beginning then, OK? Here are things you can do today to start on the path to paying off your debt and living debt-free, stress-free, and financially free.
7 Things You Can Do Today to Pay Off Debt
1. Start at the Beginning. Literally.
The very first thing you need to do is figure out exactly how much debt you have.
I know, I know. This is scary and it can make you feel a little sick to your stomach. But you have to know what you’re dealing with before you can even think about creating a plan to pay off debt. Gather statements for your credit cards, car loans, mortgages, and anything else you want to pay off.
Include any items that have been turned over for collection. For more information about dealing with collection items, check out my post on how I repaired my credit.
Make a list of everything with a balance that you want to include in your payoff plan. Use any method that works for you. It doesn’t matter if it’s a spreadsheet, a budget app, or pen & paper. The important thing is to get it all down. The cold, hard truth of your actual debt should be your motivation to tackle it once and for all.
2. Make a list of all your monthly expenses
You’ll refine this later into an actual budget but for now, make a list of everything you pay out in a month.
In addition to your monthly debt payments for car loans, student loans, and credit cards, make sure you include everything you spend money on like rent, utilities, groceries, gas, parking fees, memberships, clothing, and entertainment. If you don’t have an exact number now, just a guesstimate will work.
While you’re making your list, include due dates because you’ll need that for your budget later.
Now that you have your total monthly expenses, go through and indicate which ones are “have to pay” and which ones aren’t necessities. It’s nice to buy new clothes every month but you don’t absolutely need to have them in order to survive. Also, indicate which things have some flexibility. You may pay $400 a month for groceries right now but that doesn’t mean you have to spend that much.
3. Figure out your total monthly income
If you’re a salaried employee this is easy because it’s the same amount every pay cycle. If you’re an hourly worker and your hours fluctuate, try to base this on the average amount you work. I wouldn’t include overtime in your income unless it’s absolutely guaranteed or mandatory at your job. Nothing busts a budget faster than overestimating your income so it’s wise to be conservative and estimate lower rather than higher.
If you earn money from a side job or hustle, again I would only include it if it’s a steady thing. If you receive a bonus or earn more than you expected, you can deal with that a lot more easily than a shortfall. Coming up short can derail your efforts and have a negative mental impact. Positive thoughts help!
4. Make the first draft of a budget
You’re probably wondering when we’re going to actually get to the part where you pay off debt. But trust me, a good solid plan is going to be the foundation of your success.
The first draft of your budget should be the “as-is” version. The final version is the “to-be” version. As-is and to-be analysis are used in business process analysis to introduce improvements to processes and make them more efficient. The concept works here too. And yeah, I’m a total geek.?
The as-is version of your budget is basically your income minus your monthly expenses as you calculated them in step 2. Again, use any method that works for you. Although I have several budgeting apps, I go back again and again to my old spreadsheet method.
Create a line item for each bill or expense from Step 2 and get a grand total. Subtract this from your monthly income. If this amount is positive, that’s great! This is the extra amount you have to put towards your debt.
If your expenses are more than your monthly income, Houston, we have a problem. You’ll need to go back to those expenses you indicated had some flexibility and reduce them enough so that you have at least a little surplus left over. If you’ve whittled down your flexible expenses as much as you can and still are in the red, it’s time for some tough love. Take a long, hard look at what you’re paying out in a month. Make a decision about what you can eliminate in order to save money. Think about whether the money you’re spending is worth the stress of living with debt.
You should go through the above steps even if you had money left over after expenses. There are always ways to trim fat from your budget if you’re willing to make the sacrifice. The more money you can find to pay off debt, the faster you’ll reach your goals.
5. Pick a system or method to pay off debt
Now you need to decide how you’re going tackle paying off your debt. Dave Ramsey’s Debt Snowball method is an extremely popular way to go about it. The gist of it is that you pay off debt starting with the smallest balance first. Then your monthly payment from that debt gets applied to the next largest debt until it’s paid off. Then both of those monthly payments go towards the next one in the list and so on until they’re all paid. The mental benefit seems to be the best with this method. The good feeling of accomplishing small goals in a short amount of time is a great motivator to keep going.
Another way might be to take the opposite approach. Start by paying off the debt with the highest interest rate since that’s ultimately costing you the most money. Putting extra money towards the principal every month reduces the amount of interest you owe. This one can be tougher mentally because it could take a while to see results depending on how much you owe. But the longer you stick with it the faster you’ll see the balance drop.
A really great resource for creating your payoff plan is this online early loan payoff calculator. You enter the total amount remaining on your loan, your interest rate, your minimum monthly payment, and the extra amount you want to put towards it. You can even see the amortization schedule for a monthly breakdown of your payment. What’s really awesome about this calculator is that it shows you how much you would pay if you kept your payment at the current amount and how much you’d save with the extra payment. It’s a great way to see what an impact that extra money makes. Credit Karma also has a credit card repayment calculator. This one is cool too because you can change the amount of your payment to see how it affects the timeline for paying it off.
6. Now it’s time to make your “To-Be” budget
Whatever method you decide to use to pay off your debt, write it down and come up with a plan. It could be something as simple as writing down your debt in the order you want to tackle it, the amount you’ll pay towards it each month, and the number of months it will take you to get there. You could use an app like Mint or the really popular You Need A Budget (YNAB). Apps and programs are great because of the built-in reports and notifications that help keep you on track. A homegrown system might be harder to manage.
There are any number of methods for creating a budget. The method I’m really digging right now is the zero-based budget, where you allocate every single dollar of income to some line item in your budget whether it’s savings, fun money, debt payoff or bills. At the end of the month, you should have zero dollars unaccounted for. It sounds a little crazy but it makes sense when you think about it. It’s a way to make every cent work for you. You don’t waste nearly as much money because it’s all already allocated to something.
I could do an entire post on budgeting (and probably will) but it’s important to keep a couple of things in mind.
Paying off your debt is important but it’s also important to have savings built up for unexpected expenses or emergencies. If you’re already on a tight budget you’re probably thinking this is impossible. But you can learn to live with less. Do whatever it takes to build up an emergency fund first. Sell your stuff, pick up a side job for a while, whatever. It only takes one expense that you weren’t expecting to set you back. And once that happens, it’s really easy to give up. Don’t let that happen!
Don’t forget to include maintenance expenses in your budget. Keeping up with the maintenance on your home and car is going to save you money in the long run. If you skip it, it’s really likely something’s going to break or need to be replaced and there you go – budget busted. Just set aside a little each month for these so you’re ready when it’s time.
In your “to-be” budget, write down all the monthly expenses you determined were absolute necessities and the amount you’ll be paying towards your debt based on the plan you came up with. That’s it! Now you’re ready to start paying down your debt.
7. One More Thing…
Tell your friends and family about your decision to pay off debt. By letting other people know, you’re holding yourself accountable for seeing it through. If you make this decision in secret, it makes it easier to give up because no one will ever know. And really, you can use the support from those closest to you. They’ll cheer you on and give you a needed boost if it seems like you’ll never be done with it. And if they’re aware of what you’re doing, it’s easier to plan budget-friendly activities.
NOW you can get started
It only takes 7 steps to put you on the path to living debt-free. Living a life without debt hanging over you allows you to do the things you always dreamed of doing but couldn’t afford. It opens up a whole new world of possibilities.
It will take hard work and dedication to get there but the end result will be so worth it.